RPT-Fitch: Residual value shifts may alter U.S. car rental fleet mix
Sept 13 (Reuters) - (The following statement was released by the rating agency)
The largest U.S. car rental firms continue to report healthy gains on sale, helped by robust residual values for used vehicles disposed from their fleets. However, Fitch expects a pullback in residual values to eventually alter the mix of risk and program vehicles in leasing company fleets. This will require rental firms to proactively manage their fleet mix and usage to capitalize on evolving vehicle economics and disposition channels in order to boost earnings.
Rental car companies such as Hertz, Avis, Budget and Enterprise have the flexibility to optimize the mix of risk vehicles (those owned and subject to residual value risk at the time of sale) and program vehicles (leased for a shorter period before return to the manufacturer).
In recent years, auto rental firms have increased the size of their risk vehicle fleets substantially relative to program vehicles. For example, risk vehicles currently represent 96% of Hertz's U.S. rental fleet and 62% of its international fleet as of June 30, 2013.
Among other factors, the build-up in risk vehicle fleets reflects the strengthening of used car prices, which peaked in 2011. A healthy used car market allowed rental firms to extend the service lives and mileage of rental vehicles while still realizing sufficient gains on sale at the time of disposition. Program vehicles, by contrast, have restrictions on mileage and usage intended to reduce residual value risk to the manufacturer.
Additionally, rental firms alter the mix of risk versus program vehicles if discounted pricing opportunities with manufacturers arise. Manufacturers may discount bulk program vehicle prices, spurring rental companies to increase the number of program vehicles in their fleets. Given strong demand and pricing for new and used vehicles over the past three years, these opportunities have not been in the favor of rental firms, but this may change if values decline.
Manheim Consulting's Used Vehicle Value Index stood at 122.3 in August, compared with a peak of 127.8 in May 2011. This indicates that wholesale vehicle prices are declining modestly from the elevated levels of recent years. Used car values have fallen back from their 2011 highs as increased new vehicle production rates and greater retail lease penetration boosted supply. Still, used car values remain higher than pre-crisis levels, suggesting there may be further declines ahead.
Fitch's Auto Lease Residual Value Loss Index has mimicked the trends observed in the Manheim Index. As of July, Fitch's index registered gains of 10.8% of returned residuals, down from a peak of nearly 30% in February 2011. We expect residual values to continue normalizing into 2014 as increasing new vehicle sales (which began in 2010) and a substantial rise in retail lease residual maturities increase used vehicle supply.
Net depreciation rates remain near their lows as a result of strong used car values but these rates will also likely moderate as wholesale prices fall over the next year. As a result, risk vehicles will likely comprise a large but declining share of leased fleets over the near term.
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